Taking out a personal loan affects your credit score in multiple ways, both positive and negative. Understanding these impacts helps you make informed borrowing decisions. This guide explains hard inquiries, credit utilization, payment history, credit mix, and when personal loans help versus hurt your score.
When you apply for a personal loan, the lender performs a hard inquiry (also called a hard pull) on your credit report. This is a formal request to see your credit history. Hard inquiries lower your credit score by about 5-10 points temporarily.
Why? Lenders view hard inquiries as a signal that you're taking on new debt. Multiple hard inquiries in a short time suggest you're desperate for credit, which increases risk. However, this impact is temporary. After 12 months, the hard inquiry disappears from your report entirely. After 24 months, it stops affecting your score even if it's still visible.
One hard inquiry is no big deal. Multiple hard inquiries within 30 days for the same type of credit (like personal loans) typically count as a single inquiry, so shopping around for the best loan rate doesn't significantly hurt you if you do it within a month. After 30 days, each new application creates a separate hard inquiry.
Opening a new loan account lowers your average account age. If you have accounts that are 10 years old on average, and you open a brand new personal loan, your average age drops to maybe 6 years. This signals to lenders that you're taking on new obligations. The impact: 10-15 point score decrease temporarily.
This impact diminishes over time. After 6 months of on-time payments, the score recovery begins. After one year, the impact is mostly gone. The key: make every payment on time, and the account age impact disappears.
Credit utilization measures how much of your available credit you're using. It's calculated as total credit used divided by total credit available. Utilization has two components: revolving credit (credit cards) and total credit.
Personal loans are installment loans, not revolving credit. Most lenders don't include installment loans in revolving credit utilization. However, some lenders do count total outstanding debt as a percentage of total available credit. So if you borrow $10,000 on a personal loan, that might affect your overall credit profile.
The impact is usually minimal for installment loans. Credit cards still dominate utilization calculations. But it's worth understanding: taking a large personal loan can affect your overall debt-to-income ratio, which lenders examine when evaluating creditworthiness.
Payment history is the most important factor in your credit score (35% of your score). Making on-time payments on a personal loan builds positive payment history and eventually increases your score significantly.
| Months of On-Time Payments | Typical Score Impact |
|---|---|
| 3 months | +10 to 20 points |
| 6 months | +20 to 40 points |
| 12 months | +50 to 100 points |
| 24 months | +100 to 150 points |
This is where personal loans help your credit. Every on-time payment reinforces that you're reliable. Lenders love on-time payment history. By the 12-month mark, the initial hard inquiry impact is completely offset by positive payment history. After 24 months, a personal loan becomes a significant credit-building tool.
Your credit mix (15% of your score) includes credit cards, mortgages, auto loans, and personal loans. Having multiple types of credit shows you can manage different debt structures. A personal loan adds installment loan diversity to your profile.
If you only have credit cards (revolving credit), adding a personal loan demonstrates to lenders that you can handle installment payments. This subtle benefit gradually increases your score as the loan ages. The impact: about 10-20 points after 12 months of on-time payments.
| Factor | Personal Loan | Credit Card |
|---|---|---|
| Hard inquiry impact | 5-10 points (temporary) | 5-10 points (temporary) |
| Utilization impact | Minimal | Very high (35% of score) |
| Credit mix benefit | Yes, adds diversity | Limited (revolving only) |
| Payment history benefit | Yes, 35% of score | Yes, 35% of score |
| Long-term score impact | +50 to 150 after 24 months | +30 to 80 after 24 months |
Personal loans often help credit scores more than credit cards because they add installment loan diversity and aren't subject to utilization calculations. However, both build positive payment history, which is the most important factor.
Week 1-2: Hard inquiry lowers score 5-10 points.
Month 1: New account lowers score another 10-15 points. Total impact: 15-25 point decrease.
Months 3-6: Consistent on-time payments begin offsetting the initial impact. Score starts recovering (+10 to 20 points from month 3 baseline).
Month 12: Initial hard inquiry impact disappears from calculations. On-time payment history has built significantly. Score is typically higher than before the loan (+30 to 50 points from pre-loan baseline).
Month 24: Loan has been on your report for 2 years. Credit mix, payment history, and other factors all work in your favor. Score is typically 50-150 points higher than before you took the loan.
Paying off early is financially smart (you pay less interest), but it doesn't improve your credit faster. Your score is based on payment history and account age, not account status. A fully paid loan still helps your score. Some lenders close accounts when paid off, which can hurt your score slightly (lost account age). Check your loan terms.
If you apply for a mortgage within 3 months of a personal loan, it might. The new account and hard inquiry can hurt your score, and lenders see new debt as increased risk. Wait at least 6 months before applying for a mortgage, ideally 12 months. By then, on-time payments have offset the initial impact.
Most lenders require a minimum score of 620. Some require 650+. The better your score, the lower your interest rate. Even if you have poor credit, personal loans are available, but you'll pay more in interest. The higher cost is a trade-off for building credit if you make on-time payments.
Personal loans have a short-term negative impact (5-25 points for about a month) and a long-term positive impact (50-150 points after 12-24 months). The key is making every payment on time. If you can't afford the monthly payment, don't borrow. One missed payment damages your credit far more than the initial hard inquiry.
Use personal loans strategically: to pay off high-interest credit cards, to diversify your credit mix, or to build credit history if you have limited accounts. Avoid borrowing more than you need or can comfortably afford. A personal loan is a tool—use it wisely, and your credit will improve significantly over time.